E Ink Holdings Inc. (8069) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the E Ink Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. The webcast replay is available after today's conference. Joining me today are CFO, Lloyd Chen; and Finance Senior Director, Patrick Chang. Now let me turn the call over to Lloyd.

Good day, everyone, and welcome to our third quarter investor conference. But before we start, let's take a quick look at the safe harbor statement. All right. Next page. Okay. Let me quickly begin with the third quarter number. First, for the third quarter, sales revenue was around about TWD 4.4 billion; operating profit was TWD 527 million. But you can tell why our year-over-year decrease was caused by Yangzhou and COVID impact and also on competitive shortage. The net income for third quarter was TWD 1.2 billion, the EPS was TWD 1.08. For the third quarter YTD, basically, our first quarter to third quarter accumulated on the sales revenue and operating traffic. And even the net income was the best third quarter YTD in the past 10 years. It's also worthwhile to mention that the operating income has been higher than the royalty income since last year. And actually, the third quarter YTD operating profit and also the net income is pretty much equal to the last year, the whole year performance of it. Okay? Next page. As for the operating profit, basically, it continued to grow due to the strong demand from markets through the eReader, eNotes, retail ESL on logistics and the Signage. As you can tell from great operating profit has been moving on positively. All right. Next page. All right. In terms of the ROE and ROA, basically, on third quarter YTD ROE and ROA has been rising since 2017. Third quarter YTD this year, ROE was around 11.9% and the ROA was around 7.8%, respectively, which was pretty much 100% of 2020 whole year ROE and ROA. It shows the growing profitability and how we -- efficiency and the fact that we utilize the shareholder equity on assets to generate the profit at E Ink. Next page, please. And for the asset side, even on the equity, positive on increasing trend on cash assets, total assets, even the net asset value on -- per share, as you can see from the screen. All right. Next page. Talking about the cash flow. Even the cash was decreased from TWD 13 billion to TWD 10.2 billion because we basically converted cash to financial investments and to CapEx on the ePaper production line to meet the strong market demand. The total financial assets plus cash we had by third quarter was increased to around TWD 30.3 billion by third quarter this year. All right. Next page. All right. So after I just explained those on the financials, let's take -- could look at the accomplishments we made in the third quarter. Quite a few awards being received overseas. We won 2 awards from Asia Responsible Enterprise Awards, aka AREA. This program basically recognizes and honors deserving Asian businesses for championing sustainable and responsible business practices. And -- but I just mentioned earlier, we won 2 awards. The first one is Green Leadership, which recognized the impact of running the company's business from a sustainable environment and seeks to reduce and reverse the impact. And the second one we won is Investment in People. So basically, this award, investment in people, honoring on the company that has -- on the policy and programs that show respect and care for the employees. And another one we won is also relevant to the HR related -- is from the HR Asia. We won best companies to work for in Asia, we're among basically [ 292 ] contestants. Also for the product, we -- our Spectra 3100 all-in-one driver won the Computex Taipei 2021 Best Choice Awards. And last but not least, I think months ago, our -- one of our manufacturer site at Yangzhou was impacted on due to the COVID. And now has fully recovered from COVID, and basically is accelerating the clearance of the backlog orders. So that's about the accomplishments we made for third quarter. And another exciting news is about ePaper certification. So we basically work with the experts at TÜV Rheinland together on for more than 2 years to develop a metric for evaluating specific optical indicators on reading comfort for paper-like display products. And we are very happy to obtain the first paper-like display certification from TÜV Rheinland. And our product has long been associated with less eye strain and low power. And those certifications are proof that ePaper is truly like a conventional paper, displaying images without any back lighting. We definitely will work with our ePaper on ecosystem partners to promote the paper-like display certification. And we'll continue to innovate and bring our customer on the most comfort visual experience possible. And it's worthwhile to mention that the new certification was awarded to our color ePaper display by using on the latest Kaleido Plus technology. In addition to our true paper-like experience, our product basically help the customer reach their net zero carbon emission and also the sustainability goals through our products as a global [ on ] sustainability trend continue to shape the economy, right? That's about the ePaper certification we just obtained. Next page. And the next page is a quick update about the E-paper Industry Alliance, EPIA. I think in the first quarter, we launched the establishment of the E-paper Industry Alliance, and they were almost [ 60 ] companies have joined by first quarter. But by third quarter now, more than 90 companies already joined. And we believe more than 200 company will be joined next year. And once again, the purpose of the alliance is to build up a better platform for ePaper ecosystem, and while utilize the platform to expand the ePaper applications on different domains, such as smart transportation, airport, education, factory logistics, retails, and even to the smart office and hospitals. So all the members in this alliance can explore more on business opportunities. So that's about the quick update on the alliance we introduced in the first quarter. And I think right after the second quarter result conference, we received quite a lot of inquiries about our ePaper production line expansion plans. So we'd like to take this opportunity to explain again. So as explained in previous quarter, apart from 2 existing ePaper production lines we have, as you can see from the [indiscernible] one in South Hadley, Massachusetts in states, and another one in Linkou, Taiwan. We started capacity expansion for future growth for 4 additional ePaper production lines, as you can see from the screen. One will be pretty much fully ready by end of this year and 2 will be ready next year. And the last one would be ready sometime end of next year or early 2023. And apart from those 4 additional production lines. We also have the [Hsinchu] new building is under trending for the factory and office. Basically, those information explains on the preparation for the future growth. We do feel the strong ePaper demand, which is higher than our supply. Therefore, how we better manage our supply chain on ePaper capacity to realize those higher demand into sales revenue will be our key focus going forward. So that's about the production line expansion. And next page, please. And apart from those achievements, production line expansion, I would like to share on how we structure E Ink sustainability. As you can see on the screen, this architecture or you may call it E Ink sustainability framework, basically, starts with one big corporate sustainability goal, including both profitability and sustainability. And if -- it goes further down, with some close scope, 4 scopes, basically, a [ green ] product in nature and plus ESG. Then deploying down on to 5 pillars, as you can see on -- from the screen, basically environmental sustainability, it's all about sustainable -- green sustainable products from the sustainable manufacturing; social engagement, and I'm going to talk about that later in a separate page; in corporate governance, concerning the governance empowerment for the corporate growth; plus information transparency; and together with the stakeholder relationship, basically, by engaging more on stakeholders in terms of the ESG. And then if I go further down, we have basically 6 foundations, but that, basically, as you can see from the screen, it's all about the product on sustainability, green production, enterprise care, corporate governance, supply chain, and project and stakeholders. Across these 6 foundations, risk management is also equally important and definitely a critical mechanism to secure on the achievement of those actions by identifying on risks -- mitigating risks. And definitely, we'll be removing risks during the execution. Last but not least, the 6 foundations mentioned above basically is fully tied up with the 4 key SDG elements, basically sustainable development goals initiated by United Nation, which enabled us to go with the global development initiatives to dedicate them to be part of awards [indiscernible] during the ESG execution process. So that's about our sustainability framework. In the next page. Based on the sustainability framework I just explained, for the social engagement, one of the key important items, we have been conducting the eReader for the future projects since 2017. We basically collaborate with our ecosystem partners jointly to donate eReader devices and eBooks. The purpose of doing it is to build up the e-library for school. After years of solid works, we have humbly donated nearly 2,000 e-reader devices, more than 160,000 copies of eBook to 100 elementary schools already. And 20 libraries benefited more than 30,000 students, with generated more than TWD 170 million on value on the equivalent. And on this project of E-reader For The Future 2021 will be held tomorrow in Taiwan. And we also take this opportunity to share with you. And at the same time, while we are having the result conference on various Taiwan Corporate Sustainability Award is taking place now. For the consecutive [ 6th ] year, joining TCSA, Taiwan Corporate Sustainability Awards. But we continue to be awarded with 3 awards. The first one is Sustainability Comprehensive Performance Award. The second one is on Corporate Sustainability Report Award. And the last one is the Growth Through Innovation Leadership Awards. And among those awards, we especially appreciate the last one, on the growth through innovation leadership award, which recognize our dedication on developing the ePaper technology by utilizing green products to then help our customer to reach the goal of net zero carbon emission. And the last one I would like to share is the TCFD Supporter. We signed up TCFD Supporter this year. We definitely were diving deeper to the TCFD framework through various climate and related and financial disclosures. We are [possible ] to analyze, prepare and even prevent the potential risks on the climate change. It basically enabled us to echo of what the United Nations of SDG 13 climate action is stating as one of the global social citizens. So that -- those sustainability activities and the institution, we will sign up in the third quarter. And the last one, by the way, I thank you for participating on this -- on the web conference. But I think please also follow us on the Facebook. You just simply type E Ink, and you can add and follow us. And basically, we will provide the latest and greatest product and technology. And also those sustainability activity we are going to take or we have done. All right? So that's about the third quarter result conference that we'd like to share with you. And let's move to the Q&A session.

[Operator Instructions] The first question is from JPMorgan, [ Julian ].

I have some follow-up questions. So I didn't get my answer -- my questions answered in the last Chinese session. Okay. I have follow-up questions on your new production lines. First is that, for the 4 lines that you have been planning, are they all dedicated to color ePaper or some of those lines will still be black and white? Would that be a dedicated line for each type or they can own the mixed production? That's my first question.

Right. Basically, for those new production lines, we can cover both type of our ePaper products. However, how to allocate that the product is pretty much up to the operational needs and also the demand from our customers.

Got it. And -- okay. My second question is what's the years you used for the depreciation for the new lines?

Your question is a useful year?

I mean, yes, the years for the accounting still be used for the depreciation for those new lines.

Right. I can't remember properly now. But I think you can get those information from our financial report. Yes. I'll leave you to find out, yes.

Okay. So you mean you'll follow the existing parties?

Yes, definitely. And I think you can get the information from our financial report. I think 3 to 5 years yes, as I recall, 5 years, 3 to 5 years.

Okay. And could you remind me again the total CapEx you will spend for these 4 lines?

Right. I think that would be too specific to talk about the CapEx for those 2 production lines. But I think in general, the terms of CapEx for this year, that would be ranging from, I don't know, 1 -- TWD 1.5 billion to TWD 2 billion. And for next year, that will be ranging from TWD 2 billion to TWD 3 billion in the whole year throughout the years.

And that will cover all the 4 lines that you plan to install in the -- for next year?

Yes. So no, because it depends on how soon we get it ready. For example, if the last one of -- is not ready by end of next year, so perhaps some of the CapEx will be carried forward to next year. But I think in general, you can stick to those number I just mentioned to run your [indiscernible].

Got it. And for your -- for the 4 new lines, I'm wondering, do you -- did you sign up any long-term contracts for those lines to support your such aggressive expansion?

Well, that would be too specific. I hold my comment on this. I apologize for that. Yes. I think let me put it this way, we definitely have a certain level of confidence for this production line expansion. Yes.

Okay, okay. And my final question would be on the driver IC side. I know that you only [indiscernible] for your own module. But given that your [ ePaper ] capacity expansion is so significant, but then driver IC from the supply remains relatively tight. I wonder how your customers, those system integrator or module -- etech module assemblers, how confident are you in their capability to secure sufficient driver IC to support the volume that you're going to ramp up?

Right. I think that's going to be still a potential issue going forward. However, through the increasing market share of ePaper, I believe on those driver IC vendors, they do see the potential of this market. So I'm sure they will figure out how to allocate more for the ePaper-related products. So to answer your question, there could be the potential issue in terms of the component shortage, but we believe the situation will gradually getting better. Yes.

Okay. In your -- okay, a sort of a follow-up on this question. So in your sort of a discussion in the Chinese session about the volume increase by about 130% to 150% next year, would you consider driver IC supply the key risk will keep downside risk to this target?

I think it could be affecting that number, but I don't think it would be significant. Yes.

Got it. Okay. If I may, a final question on gross margin. With the increased depreciation, as you ramp up the new production lines, shall we expect your gross margin to be lower than this year's average given the higher depreciation? Or do you think that the continued economies of scale can help you continue to -- and also the product mix can continue to help improve your gross margin trend?

Yes. I think Johnson indicated in the previous result conference, I mean the Chinese one. Basically, we will moving towards material sales gradually more and more. So that definitely will be helpful for our gross profit margin. So I think that's a bit. I want to answer your questions. Yes.

The next question is from [ Vasu ].

It's [ Fraser ] from Herald. We very much enjoyed being shareholders and are excited by the progress you're making. Could you just help understand a little bit more about where the demand is -- the demand increase is mainly coming from at the moment? We looked at some of the [indiscernible] labeling companies and actually invested money in Korea called [ SOLUM ]. But is a lot coming from shelf-labeling, increase in demand, or is other areas as well?

Right, right. Basically, we do see the increase in demand from various applications and products. For the e-reader and e-notes, we do see the increase in demand. As for the [ ESL ], we see much more stronger demand. So to answer your question, both applications, the demand are increasing, yes, but relatively stronger from [ ESL ].

Okay. And then those comments that the other person asking the question, just maybe it's about volume increase of 130% to 150%. Should we expect that tie into a revenue increase of that amount as well logically? Or is there any reason that the revenue shouldn't increase by a similar amount?

I think, [ Fraser ], it all depends on the -- how we allocate the product, because for the module sales, especially for eReader and eNote, we supply the module, so the ASP is relatively higher. But for the material sales, we only supply the ePaper material. So the ASP is relatively lower. But in general, so the capacity will be increased [ from ] 130% to 150%. So it depends on how we allocate those products. But I think in general, the company is growing positively, yes, going forward.

And you don't have specific orders in advance, I guess, or very long in advance, like you don't have long-term orders. You tend to would have short-term ones from your module customers, would you? But you can kind of understand a little bit about the strength of the demand they're getting. So you know demand is going to be strong and you're going to grow, but it isn't actually necessarily contracted for a long time in advance? Is that right?

Basically, we do have good visibility for the orders from the module customer and the material customers. And whether it's contracted or not, I hold my comment on this yet, it's a bit confidential yet to say, yes. But as I mentioned earlier, we are quite confident towards those orders. That's why we have a plan for additional 4 production line expansion, plus the new building for the factory and offices for the further capacity expansion, I mean on top of those 4 additional production line.

And how big is the new building? How many production lines could that take?

You mean for the new building?

Yes.

Right. For the new building, basically, up to 6 additional production line can be loaded. We have the potential room for 6 additional production line. If later we decide to expand further. Yes.

And how long would it take to [ boardroom ] received the equipment in terms of equipment lead times to get if you wanted to put more lines in beyond the 4 that you've...

Right, right. For example, for those 4 additional production lines, it takes us, I think, 2 to 3 years to get everything ready. So for additional 6, maybe 3 to 4 years, yes, approximately. Yes.

And I guess just on your -- the quarterly numbers that you gave, the nonoperating income was up a lot as well. Can you just explain what is the...

[ Fraser ], can you repeat this question again?

Okay. So the nonoperating income was up a lot as well?

All right. Yes, nonoperating income. Right, right, right.

Can you explain that, please?

Yes, sure. So Fraser, for the nonoperating income, basically, one of -- basically, 2 of the key components included there. The first one is this royalty income we have been collecting from those TFT-LCD makers. And it has been happening since 2012, I believe. And the other one is, basically, we utilize the cash we have and then have it invested on those stable, low-risk, but generate a reasonably higher yield on financial products. So that's the reason we have the higher number. But for this year, in the second quarter, basically, there was a spinout transaction which happened. We got some one-off, [ non-op ] gain, one-off, that was around TWD 600 million nonoperating profit we booked in the second quarter, but that's for the one-off transaction.

And just to summarize what you said about the demand. So the strongest demand is for the demand across the business, but you said, particularly for ESL label, I guess. And so demand remain mainly for the black and white? Or are you seeing increased demand for the -- some of the color?

Not only from the black and white. Also, demand from our colored products, yes colored products. Yes.

Do you expect the shift -- the mix to shift towards more a higher percentage of color over time?

It has the potential, but it is growing, but still relatively lower, yes. But it does have the potential on those on colored products.

Okay. Right. And does demand still remain ahead of even when you've got the additional capacity? And do you still think that there will be demand ahead of your ability to supply?

Fraser, please repeat. Demand, what? Sorry, yes.

Okay, sure. So you're increasing your capacity by -- when these new lines come in by 130% or 150% next year. Will that be enough to...

Yes, yes. Right, right. I think for the next year, we believe we are pretty much okay. But the year after, I think we could be struggling a little bit in terms of the capacity. But as I explained, we have been working very hard on those production line expansion. So from now on, I think next year, we would seem quite okay. But the year after, we still don't know. Needs a bit time to observe, but it could be short, yes. That's why I say apart from those 4 additional production line, we also build up a new building to -- for the further expansion. Yes.

Next question is from [ Kathy Lei ].

I want to ask, the first question is about your opinion about the Q4 margin. And the second question is, how do we estimate the OpEx ratio and the tax ratio in the future?

All right. Sure. Thank you for your question. I think we normally don't comment that much in terms of the gross profit margin. So I hold my comments on that. In terms of the operating expenses and tax rate, so we invest quite a lot on the future technologies. So I believe, going forward, our operating expenses will be increasing. However, it definitely will not increase proportionately as our sales revenue increase. So from the percentage perspective, I believe the OpEx percentage will be getting lower and lower since our sales revenue will definitely grow. And for the tax rate, I think as for the effective tax rate, we've been working hard for our tax [ trending ]. So we believe -- basically, it will be lower than those tax rate globally because we have multiple global sites. So I'm just trying to figure out how I can give you guidance but without disclosing that much numbers. I think in the past few years, our effective tax rate is lower than 20%. And I believe it would be slightly higher going forward since we are making more money. And yes, that's the guidance I can provide. Yes.

And my last question is, what is the current technical limitation of gallery? So we didn't see it into mass production in EPD.

For the gallery, we are already in the mass production mode. And what we are working on now is we already shipped the sample to the customer and waiting for the customer feedback. And quite a few are already in the design stage. And it's a bit hard for us to comment on how you're going to go from a customers' perspective. But I think everything is moving positively.

Now we will take next question from Jerry Su.

I just want to follow up on the previous comment about the -- your capacity plan -- your capacity outlook for 2022 and 2023. I think you mentioned that you're pretty much okay for next year, and then 2023, still have some concern. Can you just help us understand or clarify a little bit what's your concern for 2023? Is it going to be shortage issues or if there's any other things that you have seen?

All right. I think the concern is coming from the stronger demand from the market. So what I'm trying to say is even we get 4 additional line ready, but it's been hard to expect how fast or how big the ePaper market will grow. So from the visibility we have so far, I think next year should be okay. But the year after, even in 2024, it's been hard to predict. And we do feel the growing momentum from the ePaper related products. So that's what I'm referring to. Yes. And further, that's why I say a new building is under planning. And if the situation of a positive scenario goes, we can still have the room for the further expansion in that new building.

Okay. So the swing factor sounds to be like from ePaper. ESL, demand seems to be quite strong. But I'm just wondering why -- if that's the case next year, why do you think it's pretty much okay given the continued proliferation of the ESL globally?

Right. I think for next year, we do have a quite clear visibility. So from those orders we received [ first ] on the production line expansion plan we have conducted, I think we are quite okay with that. Yes.

Okay. So basically, you think next year will be more balancing after the capacity expansion? And then for 2023, could have some risk going to show [ this year ] again?

Yes, could be the case. But everything is changing every day, so it seems quite okay so far. Yes.

Got it, got it. And then maybe lastly, I'm not sure if anyone have asked about this, about FFS. How should we think about the FSS license income going forward?

Right. I think let me put it in this way. We -- I suggest we better not to look at those royalty income that much, because it will be decreasing, definitely. However, our operating profit is already higher than the royalty income since last year. So I don't think that, that would be the focus to look at it. However, if you're talking about the non-op, I think in the past few years, our non-op income has been keeping a quite good level. And I think from that perspective, not to worry too much about the royal income decline. Yes.

Now we will take the last question from [Jeff Lai].

Okay. Can you give us some number about the total market value of ePaper, like in 2020 or 2021, and the percentage of eReader and ESL accounts for, and maybe each growth rate in the next few years? That's my first question.

So I think in terms of the market penetration, I think for the ESL, we are pretty much just in the 5% of the TAM. And for the eReader, and if you are talking about the ePaper technologies, I think we are dominant in this position. But if you are talking about the handheld device, including iPad and other handheld device, I think we still have a massive room to grow. Yes.

Okay. The second question is the -- can you give us the proportion of shipment area of eReader and ESL?

You mean the area of consumption, the ePaper, the area consumption?

Yes.

Right. So let me put it this way. I think on the ESL ePaper consumption, I think since last year, it's pretty much equal to the eReader on ePaper consumption already. Yes. And if -- I mean, once again, it all depends on the product mix. But I think since last year, both application products, every consumption pretty much equal. Yes. Because it doesn't really make sense if we look at the units of the shipment because it comes with the different sizes, so that's why I answer your question in the area of consumption, ePaper area consumption.

Now let me turn back to Lloyd to close the meeting today.

All right. Thank you very much for joining our third quarter result conference. And see you soon next quarter. Thank you.